CANADA FX DEBT-C$ eases to 2-month low on weak CPI data

* C$ at C$1.0311 vs US$, or 96.98 U.S. cents
    * US$ strengthens near 10-mth high on Fed QE debate
    * Bond prices rise across curve

    By Solarina Ho
    TORONTO, May 17 (Reuters) - The Canadian dollar weakened to
its softest level against its U.S. counterpart in more than two
months on Friday after data showed Canada's annual inflation
rate fell dramatically in April, far below expectations and well
off the Bank of Canada's target range.
    Annual inflation fell to 0.4 percent from 1.0 percent in
March, its lowest level since the 0.1 percent hit in October
2009 and far below the central bank's target range of 1 to 3
percent. Analysts had expected no change from March to April.
    "The numbers were softer than expected, but in line perhaps
with the weak inflation or deflation numbers we are seeing in
other parts of the world," said Shaun Osborne, chief currency
strategist at TD Securities.
    "It's hard to imagine a significant pickup in prices in the
immediate future, which is probably going to keep CPI overall
through the second quarter roughly in line with the lower end of
the Bank of Canada's view."
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the
announcement, traders cut their expectations of an interest rate
hike later this year. 
    The Canadian dollar traded at C$1.0311 versus the
U.S. dollar, or 96.98 U.S. cents, at 9:05 a.m. (1305 GMT),
weaker than immediately before and more than a cent weaker than
Thursday's finish at C$1.0192, or 98.12 U.S. cents.
    The currency last traded at this level on March 8, when it
touched C$1.0315, or 96.95 U.S. cents.
    "The currency was vulnerable already, heading into these
numbers. It was clearly on its back foot in any event, and to
have a lower-than-expected reading on CPI right across the
board, it just knocked whatever support there was for the
currency out from under it," said Doug Porter, chief economist
at BMO Capital Markets.
    "This is outside of its recent range. (The future direction)
probably depends more on the broader U.S. dollar story, but at
least for a spell we could be probing some new lows for the
    The Canadian dollar, which was underperforming against other
major currency counterparts, had already weakened significantly
prior to the data, with the U.S. dollar strengthening near
10-month highs.
    The greenback's strength was underpinned by growing debate
over whether the U.S. Federal Reserve would wind down its asset-
buying program later this year. 
    Investors added to favorable bets on the U.S. dollar,
drawing support from comments by a regional Federal Reserve
chief, who said the Fed could begin easing up on stimulus this
    The price of Canadian government debt rose across the curve
of maturities, with the 2-year bond up 2.9 Canadian
cents to yield 0.994 percent, while the benchmark 10-year bond
 edged up 2 Canadian cents to yield 1.883 percent.